Trackign the evolution and growth and key challenges and prospects of Outsourcing industry in India

1. Trends in IT/ITES Outsourcing in India
Ashok Antony
Seventh Annual International Smart-Sourcing Conference,
Center for Global Oursourcing (CGO) Hyderabad,
August, 2008

2. Evolution and growth of IT/ITES industry in India
Captive IT/ITES companies in India
Key trends and challenges for Indian IT/ITES players

3. Evolution of IT ITES Industry- Major milestones
IT/ITES exports
$ Bn 2010 target more $60 Bn
challenging due
60 to a slowdown in
US
1968 - TCS set
50 up
1970s - IBM
leaves India
1976 - HCL
40
established
1978- Patni More captive
established centers sell
30 operations
1980 – Wipro IT Emergence of ITES/BPO Captive centers begin exit
India and MNC players
services setup off shoring by American
ramp up headcount
Express, GE Capital
1981 - Infosys
(Genpact) and British
was launched
20 Airways (WNS) GE sells 60% stake
1987- Satyam in GECIS
was launched
IT players enter BPO space
10 Impending Y2K BA sells major stake in WNS
India’s economic
problem and
liberalization Third party BPO service
dotcom boom
providers emerge –
IBM returns to India
0 Spectramind, EXL, Daksh
Pre 1990s 1990 2000 2010 (E)

4. Key Drivers of the Indian IT/ITES Outsourcing Industry
Cost arbitrage
Favourable
Language
tax structure
Drivers
Industry
Qualified labor
maturity
Time zone
advantage

5. 20 Indian firms among world's top 100 in outsourcing –
challenge the BIG 6
Global Big Six
Domestic Big 6
IBM, CSC, EDS (now HP),
(SWITCH) TCS, Infosys, Wipro, Accenture, ACS and HP
Cognizant, Satyam & HCL
Ranking Company Name Ranking Company Name
3 Infosys 36 Cambridge
6 TCS 40 ITC Infotech
7 Wipro 42 KPIT Cummins
9 Genpact 46 Patni
10 Tech Mahindra 53 Zensar
11 HCL Technology 54 MindTree
16 Mastek 56 Mphasis
19 WNS Global Services 62 Aditya Birla Minacs
22 Hexaware 73 FirstSource Solutions
26 ExlService 84 VCustomer
28 24/7 Customer
Source: The International Association of Outsourcing Professionals (IAOP)
Note: Rankings based on judged on four critical characteristics: size and growth; customer references; organizational competencies;
and management capabilities.

6. Evolution and growth of IT/ITES industry in India
Captive IT/ITES companies in India
Key trends and challenges for Indian IT/ITES players

7. Captive IT/ITES companies
First wave (Pre 1990) Focused on R&D – HP, Motorola, TI, Lucent
Second wave (1990- Focused on software development – IBM,
95) Siemens, Oracle
Third wave (1995-01) Focused on IT services – Microsoft, Perot
systems, EDS, Apple
Fourth wave (2001 Focused on Financial Services – IT, BPO,
onwards) KPO services of banks, insurers
Source: Infosys Research

8. Captives versus Third party – Cost Comparison
Annual Base Salary Costs Annual Mgmt Salary Costs Mgmt staff per 1000 FTE
$9500- $70,000
16-18
$10,300 27-38% $90,000
$7700- 23-26% $55,000- 15%
$8200 higher $65000 higher higher
12-14
Third party Captives Third party Captives Third party Captives
Lower cost base makes third party centers more attractive in
the long run
Source: Everest Research Institute, CIO. COM

9. Captives – MNC players ramp up headcount
Accenture has its largest delivery centre in India (35,000
employees) ahead of the US.
IBM to have 1/3 rd of staff in India by 2010
Xansa’s India centers account for more than 60 per cent of
global delivery
LogicaCMG has half its over 6,000 global services delivery
resources in India.
Cap Gemini has 18 per cent of its workforce in India.

10. Captives – ITES players cashing out…However India remains a
key location for IT majors
BA sells stake in WNS
Deutche bank sells stake in captive to HCL
GE sells stake in GECIS
Prudential plc sells part of its captive operations to Capita
Aviva sells its captive operations to WNS
Citigroup contemplates sale of captive centre
AOL sells its BPO unit to Essar group

11. Evolution and growth of IT/ITES industry in India
Captive IT/ITES companies in India
Key trends and challenges for Indian IT/ITES players

12. Key trends and challenges for Indian IT/ITES players
Exposure to US slowdown
Wage inflation and effects of rising rupee
The lure of emerging markets
Tapping tier-II cities and graduate pool
Pricing power
High Customer churn
Competition from other low-cost countries

13. Companies try to diversify beyond US. US still remains the largest
market
10 0 %
90%
Re st of the
World
80%
70 %
Europe
60%
50 %
40% Ame rica s
30%
20%
10 %
0%
FY 04 FY 05 FY 06 FY 07
Companies look to Europe to offset currency effects and a US slowdown

14. Emerging markets to serve as alternate low cost development
centres and key growth markets for services
Near shoring to locations such as Canada, Mexico for tapping the
US market
Companies including Infosys , KPIT-Infosystems, Genpact,
Cybernet - Slash- Support (CSS) opened offices in Poland
Genpact opened an office in Mexico, to serve as its Latin America
headquarters
TCS launched a new subsidiary, TCS South Africa, to strengthen its
focus and expand operations in South Africa.
Infosys has formed a New Growth Engines (NGE) unit to
expand business in emerging markets
Satyam is expanding its footprint in emerging markets with
offices in Brazil, China, Malaysia, Hungary, Egypt, Kuwait, Saudi
Arabia, and Dubai, among others.

15. Erosion of labor arbitrage – Wage inflation and Appreciation of the
rupee
Between 2003 and May
48
46 2008, the rupee has
appreciated over 7.6%
44
At its lowest rate of 39.26 a
Dollar in Jan 2008, the
42
40 rupee was 15% higher
versus the dollar
38
According to Mercer,
36
India’s wage inflation is set
34 to average about 15 per
Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08
cent a year until 2011

16. Expansion to Tier-II, Tier III cities
Tier I cities account for over 85 per cent of IT sector
employment and over 90 per cent of the BPO employment
Approximately 50 per cent of the additional talent requirements
to be met from Tier-II and Tier-III cities
Tier II cities can offer cost advantages of 35-50 percent over
mature locations due to lower labour and real estate costs and
reduced staff attrition rates
Tier II cities to account for 40% BPO jobs by 2018
Future growth in Tier-II cities to occur in SEZs
- Emerging destinations: Ahmedabad, Bhubaneshwar, Chandigarh, Coimbatore,
Indore, Jaipur, Kochi, Lucknow , Madurai, Mangalore, Nagpur,
Thiruvananthapuram, Tiruchirapalli, Vadodara, Visakhapatnam
Source: NASSCOM-AT Kearney study

17. IT Companies look beyond Engineers
Big manpower shortfall—close to half a million—by 2010.
About 20-25 % of the technical work in the IT industry can be
done by non-engineers. However less than 10% of the staff in IT
industry are non-engineers
Top five IT players to recruit a minimum of 10,000 plain science
candidates in 2008
Advantages:
- Low entry level salary costs (30% to 50% lower)
- Right-skilling
- Optimize resource utilization
- Deployment in new areas such as infrastructure management,
testing, support and maintenance

18. Pricing Power – Companies were able to raise prices in
rising rupee scenario
A percentage rise in the rupee against the dollar leads to a
- 1.2% loss in earnings for Wipro
- 1.9% fall for Infosys and
- 2.2% dip for Satyam
Most major IT/ITES players increased prices on new
contracts and tried to negotiate on existing contracts
- Infosys raised prices for new customers and 2 percent
increase in existing contracts
- TCS prices new contracts at higher prices
However small and mid-sized companies which lacked
pricing power were hit by the rising rupee

19. Other Challenges / Trends
High customer churn among the IT majors
Decline in mega deals: In 2007, mega deals accounted for
only 6.8 per cent of the number of total contracts in 2007,
down from 7.4 per cent in 2006
Increasing competition from countries like Poland, china
etc.
KPO services to emerge as a niche high growth area
– Emergence of high-end KPO services such as actuarial
outsourcing

20. Thank You